Sunday, May 6, 2007

Chavez, the IMF, and Bond Prices

. Sunday, May 6, 2007

Hugo Chavez asserted his intention to pull Venezuela out of the IMF. The decision was apparently a bit "impulsive," that is, taken without prior discussion with anyone who knows anything about Venezuela's foreign bond situation. As it turns out, Venezuela has borrowed heavily against its future oil revenues ($21 billion) and its bond issues require it to remain an IMF member. "The conditions listed in all the prospectuses would suggest that Venezuela may have all of its global bonds accelerated and due immediately, given cross-default provisions across each issue, if it pulls out of the IMF," said RBC Dominion Securities Inc."

Bond markets reacted predictably; His withdrawal announcement sent debt prices lower this week, bucking a regional trend, and Venezuela's benchmark global bond due in 2027 fell further on Thursday to yield 0.081 per cent higher at 7.247 per cent.

Behind all of this lays the following: "In the past year, [Chavez] has been issuing billions of dollars of international bonds, assuring investors that the Opec nation's oil income would guarantee payments." Things did not turn out so well the last time Venezuela borrowed heavily against future oil earnings. I wonder how things will turn out this time around.


Chavez, the IMF, and Bond Prices
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